Federal Estate Tax in a
Nutshell

The main thing to know about estate taxes is... they will
change. Look on Wikipedia or ask anyone in the field for the
current tax structure. Because estate taxes change (sometimes
suddenly and unexpectedly—consider the year of 2010, which had
no estate tax) you must write your will and trust documents
flexibly and update them as often as necessary.

In a nutshell, here is how it works: If you have enough
assets (cash, your home, investments, your business, etc.)
when you die, your estate has to pay federal taxes (you may
become very familiar with IRS form 706, the death taxes form).
You may also have, in a few states, if you are rich enough
and/or give outside your family, to pay some inheritance taxes
to the state your estate is in. You get a significant
exemption before you have to start paying any federal estate
tax—currently $5,000,000—which is designed to shield most
people from having to pay estate tax. To quickly learn more,
read the Wikipedia entry on United
State's estate tax.

Is Estate Tax only for the Rich?

In general, only the estates of the rich get taxed, but it
doesn't always work that way. If your elderly grandparents die
in a year when the exemption is low and the family farm or
business (the ownership of which may be shared upon their
death by twenty children and grandchildren) happened to be
valued high that year, the estate could owe a lot of tax,
requiring the property to be sold.

Another scenario is that your grandfather could leave half of
his estate to his second wife and half to his
children/grandchildren from his first marriage. In order to
attempt to minimize taxes until the spouse has died (to be
sure she has enough money), the will is often written to defer
all taxes until her death. Then, when she dies, often wills
and trust documents quickly drawn up by casual estate lawyers
will either not identify who pays the taxes (then laws or
precedence kicks in), or imply that the children pay all
estate taxes. Thus, the entire tax exemption may go the the
spouse (or rather to her children, whom for a second wife, may
be completely unrelated to either you or your grandfather). A
good estate and trust lawyer will allow the grantor (the
person with the money writing their will/trust document) to
make an informed decision (hopefully).

And Then There Is Generation Skipping Tax...

When a bequest “skips” a generation, and goes to
grandchildren, then a quite harsh and draconian tax, the GST
or “generation skipping” tax applies. This means that the
estate will be taxed TWICE. It is a very stiff penalty. It was
designed, as social engineering, to keep the rich from
leap-frogging vast amounts of money down the generations
without paying tax, but until the exemption for estate tax was
raised in 2011, GST tax applied to a lot of families that kept
their family's quite modest wealth intact until the
grandparents were very old.

So...?

You really have to think carefully and often about estate
tax. If you are running a trust, you have to make really good
decisions. This will mean consulting with a skilled tax
expert. If a bank is running your trust, you have to be on top
of them all the time. Again, this will mean YOU consulting
with a skilled tax expert—shouldn't be the case, that you have
to do the work and the bank gets paid, but that is how it is,
at least in less progressive states. If you need help finding
experts, give me a call. No promises of finding an expert that
is both cheap and good. So educate yourself before you start
paying for advice.